Taxing Times and T-Birds in Alberta

Taxing Times and T-Birds in Alberta

The collapse in oil prices has, in the premier’s words, “opened up a fiscal hole” in the provincial budget. If the oil price stabilizes between $66 and $75 a barrel, the lost revenue will be in the range of $16 billion over three years – a very large sum for a province whose annual budget this year is just over $40 billion.

The problem might be even more serious. On February 2, the West Texas Intermediate Price for a barrel of oil was US$49.30. There is a glut of oil in the world economy, a glut with many causes: new shale-oil production in the US; a decision by Saudi Arabia to keep production levels high; stagnant demand for oil in Europe; and slowing demand for oil in Asia. This glut is behind the steep decline in the price of oil. Cheaper oil will make it easier for the premier to fill up his vintage T-Bird. But given the dependence of the Alberta government on revenues tied to the oil industry, it might also lead him to include deep and damaging cuts to social services as part of his overall nine percent budget reduction.

We know this from recent history. On March 2013, former premier, Alison Redford – anticipating a fiscal hole resulting from the price of oil (a fiscal hole which never actually materialized) – brought down a budget containing just such terrible and damaging cuts.

Post-secondary institutions – after having been promised an increase in funding – were instead faced with a $147-million, 7.2 percent cut. There were also deep cuts to the province’s Persons with Developmental Disabilities (PDD) fund. Throughout the spring and summer of 2013 there were rallies and petition-campaigns protesting these cuts – actions that had some impact. In October 2013, the cuts to PDD were rescinded, and reform to the program delayed. In November 2013, $50-million was restored to the post-secondary sector). This year, however, the fiscal hole is real, and the possible cuts could be very severe. University of Alberta president Indira Samarasekera said: “We have no capacity to take a nine-per-cent cut. None”.

Ideologically constructed

There is, in fact, no need for a single cut to education, health care or other social services in the province. Alberta’s problem is not a social services problem. Alberta’s problem is a deeply inequitable tax structure. Generations of conservative politicians have banked everything on the extractive industries. When oil extraction was booming this century, there was lots of money. But the extractive industries are predictably volatile, and now – again – Alberta’s finances are tanking along with the price of oil. Alberta’s fiscal crisis is ideologically constructed.

Part of this goes back to the days of Ralph Klein. In 2001, under Klein the provincial income tax was made into a “flat tax” – an across the board 10 per cent tax regardless of income. This is excellent for the very rich, and not so excellent for the government finances that sustain social services.

The first year Klein brought in this flat tax, revenue from income tax dropped 25 per cent. A reversal of the Klein flat tax and a return to the previous income tax scale would have meant at least $2.8 billion in new revenue for the province in 2014 alone (Table 1).

Source: Author’s compilation from data published by Treasury Board and Finance, Government of Alberta; and Statistics Canada.

The second taxing issue in the province has much deeper roots. Alone among the provinces, Alberta has no provincial sales tax (PST). (The three territories also have no sales tax, but their stories require separate treatment). In the US, 45 out of 50 states have a state tax, and only five – Alaska, Delaware, Montana, New Hampshire and Oregon – go the Alberta route.

The premier purchased his Vintage T-Bird in Arizona. Unlike Alberta, Arizona does have a sales tax, currently sitting at 5.6%. So presumably, when the auction ended, as well as handing over US$59,400 to Barrett-Jackson auctions in Scottsdale, the premier also paid US$3,326.40 in tax – almost $4,000 Canadian. If he were to have purchased that same Vintage T-Bird in Alberta, the premier would have deposited nothing into the provincial coffers.

Where would Alberta’s revenues be if it did have a provincial sales tax? We can come up with a pretty good approximation. Next door to Alberta is Saskatchewan, whose provincial sales tax currently sits at five per cent. Adjusted for inflation and for population size, were Alberta to collect PST in the same manner as Saskatchewan, Alberta would have increased annual revenues in 2014 by $4.98 billion (Table 2).

Source: Author’s compilation from data published by Treasury Board and Finance, Government of Alberta; Ministry of Finance, Government of Saskatchewan; and Statistics Canada.

With these two measures, by eliminating the flat tax and instituting a sales tax, provincial revenues would instantly increase by almost $8 billion annually ($24 billion over three years), entirely offsetting the decline in oil revenues, and leaving several billion aside for other purposes.

These taxation reforms could be instituted in a completely equitable fashion. In terms of income tax, why not keep the 10% rate for those with low or middle-incomes, and make it rise steadily for those with higher incomes? Nothing could be fairer.

In terms of a provincial sales tax, ensure that basic necessities are excluded from the sales tax – something already done in many other provinces. For example, in British Columbia, items excluded include basic groceries, children’s-sized clothing and prescription medications. Vintage T-Birds would not be excluded.

In other words, through ending inequities in taxation – through modestly insisting that those with rising incomes in the province pay their fair share – there would be absolutely no need for any cuts to social services.

But this is just the tip of the iceberg. While by simply implementing reasonable tax policies $8 billion would be available this year alone, the cumulative lost revenues from the zero sales tax policy from 1989 to 2014 amounts to $90 billion. The cumulative lost revenues resulting from the flat tax from 2001 to 2014 amounts to $30 billion. The combined total of $120 billion is staggering.

Think of the way in which that money could have been used to improve public housing, improve public transit, and improve childcare access. Think of the way in which that money could have been used to systematically diversify the economic base so that the province isn’t continually put at the mercy of the rise and fall of oil and natural gas prices.

And we haven’t yet delved into the other interesting area of Alberta’s finances – the royalties it receives from the extractive industries.

Contradictory pressures

Prentice is aware of the necessity of reforming the tax structure, but he is vacillating. In January he put the issue of taxation on the table. In February he reversed course. “I’ve heard very, very few people advocating a sales tax and I never have”, he told the press. This vacillation is built-in to the contradictory situation in which he finds himself.

On the one hand, Alberta has been home to an anti-tax right wing movement embodied in the Wildrose Party – compared by some to the anti-tax, right-wing “Tea Party” in the United States. In 2012, Wildrose looked set to form the next government, but in a surprise to most, ended up losing to the Tories. In December of last year, Prentice scored what has been called a “resounding victory” over Wildrose, when nine of its members of the legislative assembly – including leader Danielle Smith – crossed the floor and joined the government. This “resounding victory” also strengthened the right-wing inside the party, a right-wing that has no trouble with social service cuts, and that is absolutely allergic to any tax increases.

On the other hand, the Conservative Party does not have the same mass base it had in the past. In fact, in 2012, hundreds of thousands deserted the Tories moving to Wildrose, and the Tories were only able to win by running against their own policies, posing as a liberal alternative to the social conservatism of Wildrose. At one point in the campaign they even took out a full-colour, full-page newspaper ad saying “this is not your father’s” conservative party. The strategy worked, as the Tories were lifted back into office by thousands of young people voting strategically, not so much for the Tories, but against Wildrose. This strong showing electorally, however, did not come with any enthusiasm or an influx of new blood.

The growing weakness of the party can be seen in the steady decline in participation during leadership races. In 2006 when Ed Stelmach was elected party leader, there were two rounds of voting, 241,690 voting in total in both, 144,289 on the final ballot alone. In 2011 when Alison Redford was elected party leader, the totals were much lower – 137,715 in total for the two rounds, 78,176 of those on the final ballot . Last year, Jim Prentice’s first ballot victory for party leadership saw just 23,386 people voting. The 2011 Redford numbers look huge by comparison – the 2006 Stelmach numbers, just a dream.

This is the tricky arena in which Prentice finds himself. If he plays to his new Wildrose colleagues, he will avoid tax increases and focus on social service cuts, alienating the young, urban, socially liberal voters who rescued his party in 2012. If he tries to bend his policies in the direction of these voters by introducing modest tax increases and moderate the social service cuts, he risks a fissure on the right.

We can, with real confidence, mount a challenge to any program of cutbacks Prentice attempts to implement. The facts are very clear – any attack on social services will be driven, not by the facts, but by ideology.

And if the Tories and the remnants of Wildrose put up specious arguments to oppose the reasonable and very modest reforms outlined here – well maybe it’s time to (apologies to The Beach Boys) “take the T-Bird away”.

Paul Kellogg is a teacher and a writer focusing on political economy, political theory and social movements. Escape from the staple Trap, the first volume of a two-volume study of Canadian Political Economy, will be published later this year. He maintains an occasional blog, PolEcon.net, and helps organize with Ideas Left Out.